Thursday, August 06, 2009

On economics versus trading

Ive always been interested in the there is an order to the madness type approach to the markets. This had its roots in my (naive) original belief that you could actually "predict" the markets based on an understanding of the underlying economics. And that there were certain people out there (gnomes, masters of the universe, etc.) that knew what was going to happen next. This led me to a heavy focus on prediction during my formative years. I spent many hours first reviewing and understanding financial statements and then delving deeper and deeper into macroeconomics with a special emphasis on monetary theory.

Keep in mind that this learning was unstructured and ad hoc. There was also very little math or quantitative aspect involved. If anything the process had a major historical component that gives very little other than perspective. As I went deeper into the process I found that I learned something about the markets or the economy from listening to an increasingly small % of speakers on television, writers of books, or bloggers, etc. The opinions I respect were less than 1% of commentators. A worse surprise was that more than 50% of commentators who may have even possessed something useful to contribute were too obssessed with the republican versus democrat political dog and pony show and were merely talking their book. Great examples of this are Paul Krugman or Larry Kudlow.

Over time I destroyed some fallacies, biases, and misconceptions about the whole process of speculating and trading. My emphasis shifted from a "what's the next play mentality" to one of how can I make money doing this on a sound risk adjusted basis and a repeatable basis even if differen strategies are utilizied re: long / short, day trade / swing trade, futurers / options, foreign domestic, etf / individual stock, etc.

The two themes that I found as a constant and I want to spend the next several years exploring on the site are two fold:

1) Risk Management
2) Objective, measurable, and repeatable setups / trade entries.

The previous editorial style that took a certain underlying economic theme and extrapolated from it turned out to be worth very little to me in practice, other than the opportunity to claim that I was right about something. Unfortunately that entire line of thinking now falls into "every asshole has an opinion" as far as I'm concerned.

The future development is on the building blocks of the trading process, building a solid foundation that is also scalable up to approx $100M portfolio size and then trading the plan.

I will for fun - occasionally discuss some of the underlying economic themes as I see them, but the value of these observations other than humorous is obviously nothing. (Not that the trade implementation is worth more than nothing - only to me is it worth something.)

This weekend I will discuss a trade setup on a longer term time frame that I find interesting - I will also talk about how to manage the risk.

-Ben

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